Zurn Elkay Water Solutions Corporation (NYSE:ZWS) Q2 2024 Earnings Call Transcript

Zurn Elkay Water Solutions Corporation (NYSE:ZWS) Q2 2024 Earnings Call Transcript July 31, 2024

Operator: Good morning, and welcome to the Zurn Elkay Water Solutions Corporation’s Second Quarter 2024 Earnings Results Conference Call with Todd Adams, Chairman and Chief Executive Officer; David Pauli, Chief Financial Officer; and Bryan Wendlandt, Director of FP&A for Zurn Elkay Water Solutions. A replay of the conference call will be available as a webcast on the company’s Investor Relations website. At this time, for opening remarks and introduction, I’ll turn the call over to Bryan Wendlandt.

Bryan Wendlandt: Good morning, everyone, and thanks for joining the call today. Before we begin, I’d like to remind everyone that this call contains certain forward-looking statements that are subject to the safe harbor language contained in the press release that we issued yesterday afternoon, as well as in our filings with the SEC. In addition, some comparisons will refer to non-GAAP measures. Our earnings release and SEC filings contain additional information about these non-GAAP measures, why we use them, and why we believe they’re helpful to investors and contain reconciliations to the corresponding GAAP information. Consistent with prior quarters, we’ll speak to certain non-GAAP metrics as we feel they provide a better understanding of our operating results.

These measures are not a substitute for GAAP. We encourage you to review the GAAP information in our earnings release and in our SEC filings. With that, I’ll turn the call over to Todd Adams, Chairman and CEO of Zurn Elkay Water Solutions.

Todd Adams: Thanks, Bryan, and good morning, everyone, and thank you for taking the time to call in this morning. So I’ll start on Page 3. We turned in what we believe is a pretty solid quarter and are, again, raising our outlook for the year. We leveraged core growth of 3% into 20% adjusted EBITDA growth, which drove margins to 25.3%, equating to 370 basis points of margin expansion year-over-year. Free cash flow in the quarter was $80 million, and we deployed $60 million to repurchase almost 2 million shares in the quarter. For the first half of the year, in dollar terms, EBITDA is up $35 million, and free cash flow is up $50 million over last year’s first half, and we continue to expect a nice second half from a cash flow perspective.

Qualitatively, our underlying markets continue to match our views coming into the year, and we’re making steady progress on our growth initiatives and breakthroughs. Hopefully, our results over the last 12 months have answered the question on whether or not we’d achieved the $50 million-plus in synergies from the Elkay transaction, given where our consolidated EBITDA margins now sit. Our story at this point is really quite simple. We have what we believe is the premier water solutions business in North America, with best-in-class financial performance, and a business system and culture that underpins our confidence in being able to perform at a very high level, regardless of the macro environment. We have a balance sheet and cash flow profile that puts us in a position to reliably and increasingly return capital to shareholders, while executing on proprietary M&A opportunities moving forward.

I now have the privilege of turning the call over to our newly minted CFO, Mr. Dave Pauli. At the same time, I’d like to say good morning to our former CFO and now Chief Administrative Officer, Mark Peterson, who’s listening in as he’s driving to work, and certainly not missing having to get here early for this call. Dave?

David Pauli: Thanks, Todd. Please turn to Slide #4. Our second quarter sales totaled $412 million and increased 300 basis points year-over-year on a pro forma core basis. Mid-single-digit core sales growth in our nonresidential end markets and initiatives was partially offset by flattish year-over-year sales to our residential end markets and pockets of the commercial segment within nonresidential. With respect to demand in the quarter, year-over-year order growth was in line with our sales growth as our book-to-bill ratio was just above 1 in the quarter. End market trends continue to align with our expectations, and our growth initiatives drove the sales performance to the higher end of the outlook we provided 90 days ago. Turning to profitability.

Our second quarter adjusted EBITDA increased 20% from the prior year second quarter to $104 million and our adjusted EBITDA margin expanded 370 basis points year-over-year to 25.3% in the quarter. At 25.3%, our second quarter adjusted EBITDA margin is the highest consolidated margin since the Elkay merger 2 years ago. The strong margin and year-over-year expansion was driven by the benefits of our productivity initiatives inclusive of cost synergies plus the lower material and transportation costs compared to 1 year ago. For calendar year 2024, we believe our year-over-year margin expansion will be a bit better than what we discussed 90 days ago, and we are again raising our expectation for full year EBITDA margin. We will cover that in more detail later in the call.

Please turn to Slide 5, and I’ll touch on some of the balance sheet and leverage highlights. With respect to our net debt leverage, we ended the quarter with $333 million of net debt and leverage continued below 1 at 0.9x. Our 0.9x leverage is inclusive of the $61 million we deployed to repurchase shares in the quarter. On a year-to-date basis, we have now deployed $80 million to share repurchases and $28 million to dividends. We continue to have excellent capital allocation optionality and, as we have discussed, we will remain focused on a balanced capital allocation strategy going forward. I’ll turn the call back to Todd.

Todd Adams: Thanks, Dave. I’m on Page 6. Here you can see our year-to-date sustainability impact and progress towards our targets. We continue to see sustainability as both a core part of and natural byproduct of our business. The vast majority of our sales in the quarter came from products that deliver sustainable attributes to our customers, products that reduce water consumption, protect the potable water supply in buildings, reduce energy or GHG consumption or are made of high levels of recycled content. Whether it’s reducing water usage, filtering out contaminants from water or eliminating single-use plastic bottles, we continue to innovate to address water-related challenges to public health and conservation. We’d run our business the same way even if there wasn’t anyone looking, because the essence of what we do is to help our customers with their water challenges.

But since people do keep score, I think it’s important to note that across the main agencies that rate us on our own sustainability efforts, we are either in the top 3%, top 8% or top 10% rated across the broad university of companies rated by these agencies. We approach sustainability with the power of delivering great results and helping our customers meet their challenges, and doing the right thing for the environment, our associates and shareholders. I’ll leave everyone with just a few thoughts on Page 7. Halfway through 2024, we’ve raised our outlook for the year twice. If you look at a longer timeframe, we’re growing at about only half of our 10-year CAGR. This is because of the highly publicized demise of the commercial end market in nonresidential construction.

I say that a little sarcastically, but there have of course been and in the near term will continue to be some headwinds from the commercial end market, and also a bit of a flattish residential market. Despite this, we are still growing and generating exceptional margins and free cash flow through a combination of our unique competitive advantages. To name a few, our end market exposures, specifications, portfolio breadth, new versus retrofit balance, and differentiated secular growth opportunities like drinking water and, perhaps most importantly, the deployment of the Zurn Elkay business system. Dave gave me the updated statistic yesterday about our core growth track record. Over the past 54 quarters, that’s 13.5 years if you’re playing along at home, we’ve had exactly 4 quarters we did not grow organically, which I think is a pretty decent sample size to evaluate our track record.

Also of note, the largest decline in any 1 of those 4 quarters was down 5% in the pandemic quarter of June 2020. During this current period, I’ll say of undergrowth we’re in, to me the silver lining is that our new baseline of margins in cash flow is materially higher than at any point over the past 10-plus years. We’re returning more money to shareholders than ever, and we continue to have ample capacity to do the right M&A while keeping the balance sheet in great shape, which brings me to the last point I’ll make before turning it over to Dave. The thing that people either underestimate or don’t understand about Zurn is the culture, or really how foundational our business system is to our success. The pillars of people, plan, process, performance, and purpose aren’t just things we throw on a chart to talk about with people.

It’s deeply rooted in how we run our business and grounded in the spirit of relentless continuous improvement. Over the last few weeks, we’ve gotten some questions regarding Dave’s promotion and Mark’s new role, all with a hint of what’s the story behind the story. The answer lies in how we actually deploy and do the real work around the first pillar of the Zurn Elkay business system, which is people. By truly recruiting, developing, and retaining the best talent, it requires an intention, discipline, and selfless perspective to do what’s right for the business and the individuals to create long-term sustainability. And when I say sustainability, I mean it in the context of the ability of continuing to perform at a high level without any decline in quality.

And that’s exactly the situation we have with Dave and Mark. We’ve promoted an extraordinarily talented guy to CFO who was ready, 42 years old, been here for 12 years, knows the business inside and out, and has tremendous runway. And we get to leverage Mark’s talent, experience, and understanding of the business system into a bunch of new areas after having been here for 18 years, including 13 as CFO. We’re in an enviable position to have affected this kind of organizational maneuver, but it wasn’t on accident. It’s just how we approach things. So Mark, I’ll see you in about 15 minutes. Dave, congratulations and well earned. Go ahead and hit the outlook on Page 8.

David Pauli: Thanks, Todd. Please turn to Slide 8, and I’ll cover our outlook for the third quarter and update to our high-level guideposts for calendar year ’24. For the third quarter, we are projecting year-over-year pro forma core sales growth to be in the low single-digits, and we anticipate our adjusted EBITDA margin to be approximately 25% for the quarter, which represents an approximate 90 basis point margin expansion over the prior year. Taken as a whole, Q3 will look a lot like our second quarter we just finished. For the full year, we are seeing no changes to the sales assumptions we outlined at the beginning of the year and still believe we will generate positive pro forma core sales growth year-over-year. With respect to our adjusted EBITDA margin, we are again raising our outlook and now expect adjusted EBITDA margin expansion to be between 200 basis points and approximately 250 basis points year-over-year.

Our free cash flow expectation has also improved, as we are now expecting cash flow to exceed $250 million. Before we open the call for questions, just a reminder that we have included on Page 8 our third quarter assumptions for interest expense, noncash stock compensation expense, depreciation and amortization, adjusted tax rate, and diluted shares outstanding. In addition, we have included the prior year third quarter sales adjusted for the executed 80/20 product line exits to calculate pro forma core sales growth in 2024. The third quarter is the last quarter that we will have an impact from the previously announced product line exits. We will now open the call up for questions.

Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Bryan Blair with Oppenheimer.

Bryan Blair: Dave, congrats on the promotion.

David Pauli: Thanks, Bryan.

Bryan Blair: Of course. And Mark drives safely. Hey, you guys, you mentioned end markets are generally tracking as expected. I was hoping you offer some finer points on that front, perhaps drill down on what your team is seeing across institutional versus commercial non-res verticals, the resi market, and whether you anticipate any sequential change in underlying demands through the back half?

Todd Adams: Well, I think the perspective that I would give you, Bryan, is we’ve had a view that commercial was weak. And I’ll remind everyone that it has been weak really since 2020. So we’ve been absorbing the news, if you will, of this headwind quarter by quarter, year by year for a while. And so, I think our ability to understand how that’s going to roll through, we don’t expect, I think, any sort of significant change, if you will. To our view, it may be worse sequentially. But I think from an institutional standpoint, we continue to see strength. I also think it’s important to understand that inside of the commercial vertical itself, about 40% to 45% of that is actually retrofit, replace, break, fix. So while the headline on commercial construction is bad, and I think there’s a lot of reaction to that day by day, week by week, when you look at the pockets that we’re in, we are not big in warehouses.

So that news that’s rolling through the top line number has rarely little impact on us because the content that we provide to a warehousing building is relatively low. So you’ve got to look beneath the headline number and into the pockets, and we do that, and we do that by region. And I think we’ve done a pretty good job of trying to assess how that may impact our growth. And so, when you take a giant step back, and hopefully that 10-year chart gives you perspective, there is probably a 2-point headwind to our overall growth because of what we’re seeing and absorbing through that commercial headwind. But I don’t think we’re seeing anything that gives us pause that the perspective going forward is different than what we’ve already baked into our thinking.

Bryan Blair: Understood. Appreciate the detail. Margin performance has been quite strong in the last four quarters. You mentioned the synergy realization is the plus of the $50 million-plus. So I’m wondering if you’re willing to quantify that. And then looking forward, how should we think about normalized core incrementals? We’ve always thought low 30s is kind of the right range, given the structurally improved profitability of Zurn Elkay. Is that still the right normalized incremental to think about? And then finally, we know there’s a lot of supply chain action underway. Perhaps you can speak to the drop-through that we may see going forward.

David Pauli: Yes, I think you’ve got it all. Obviously the $50 million-plus, I think is something we committed to 2 years ago. The first year we spent sort of attacking some of the more addressable things and doing the work to get to that next $25 million, which clearly I think the work is done and now it’s just simply going to read through the results. And so, whether it’s $50 million or $55 million or $60 million, I’m not sure that it matters all that much other than to know that the business is entirely integrated, and we’ve sort of stopped keeping score on the discrete synergies because they just keep coming through as a consolidated number. In terms of what to think about as an incremental margin going forward, I would say that we’ve always said 30% to 35%.

I think that given some of the structural things [indiscernible] drinking water, that number is probably closer to 35% than 30%. And obviously there’s a handful of supply chain actions that we’ve been working, and will begin to accrue some of those benefits into next year. So, I would say, from an execution standpoint in and around the Elkay synergies, the structural changes we’ve made as a result of combining the 2 businesses and some of the prospective things we’ve done, we feel like we’re very much on track to accelerate margins going forward from here, and the incremental earnings growth will be that 35% plus or minus.

Operator: And next question comes from the line of Andrew Buscaglia with BNP Paribas.

Andrew Buscaglia: So just along the lines of those margin comments, just wondering, you said you got to 25% or so in Q3 EBITDA margin, which would imply a little bit of a tick down. I’m just wondering, can you walk through the puts and takes there? Maybe it’s seasonal, but your historicals sometimes move differently. But I’m just trying to understand why the tick down or what’s behind that comment.

Todd Adams: Nothing. I mean, I think when you look through it, approximately 25ish — 25.3%. I mean, so I don’t think we’re trying to be too cute. I can’t give you a reason why it goes to 25% other than we’re trying to guide with less precision, if that makes sense. And so, there’s nothing discrete that I can give you to get to at lower numbers.

David Pauli: Yes, I would just say, Andrew, I think H1 and H2 margins can look a lot alike based on the guidance framework we gave. I think Q4 typically is a step down in margin from what you see in Q3, just given the seasonality and the lower sales volume in Q4. But overall, I’d say H1 and H2 can look a lot alike.

Andrew Buscaglia: Okay. Okay. And you talked a little bit, by end market, some of the trends you’re seeing. Can you talk a little bit more how you guys would define things on the business division level with water safety, flow assistance, hygienic, and drinking water? Can you talk about some of the trends you’re seeing versus last quarter improving or worsening?

Todd Adams: Yes, I would say that there’s no substantial change. I mean, when you look at our business and the revenues, I mean, we participate across the whole build cycle. So, I would say, each of the business segments or sectors, or whatever you want to call it, is performing sort of as you’d expect given where they participate in a particular cycle and in a particular vertical. So, I would say, there’s no change across the board. There’s some seasonality to drinking water based on the school year and when that work can actually be done. But aside from that, no significant change to how the business groups are performing inside of the verticals from last quarter.

Operator: The next question comes from the line of Andrew Krill with Deutsche Bank.

Andrew Krill: Congrats again to Dave. Wanted to circle back on the orders commentary that they were kind of off in line with the company growth this quarter. So I think that means low single-digits. Just like can you give any color on, was that steady throughout the quarter? Maybe was there any change as the month progressed? And if you’re willing, like anything on July would be helpful.

David Pauli: Yes, I don’t think there’s anything to talk about. I think the order rates that we saw throughout the quarter were consistent. They remained consistent through July to sort of deliver the kind of guidance and outlook that we’ve provided. So, I don’t think there’s anything to me that was at all surprising or different. It was very steady, has been very steady really throughout what’s now the first 7 months of the year.

Andrew Krill: Okay. Great. That’s helpful. And then, on the supply chain, and I think Stacey’s looking ahead, I know in the past have been quantified as potentially around $10 million of a net benefit in…

Todd Adams: The framework is correct. I think that the only qualitative thing is, the run rate is probably closer to 10. I think there’s a lot of moves that are done. There’s some that are underway. And obviously we’ve prioritized the larger impact things towards the front end. There may be some things that take a little bit longer to work their way through, but I think from a yield perspective in 2025, I think somewhere between 5 and 10 is the right way to think about it.

Operator: Your next question comes from the line of Nathan Jones with Stifel.

Nathan Jones: You guys are making it tough to come up with questions with strong margins and no change in any of your outlook. So I guess I’ll ask a couple of questions around capital allocation. You have been a fairly consistent repurchaser over the last couple of years since the Elkay deal was done. Can we anticipate a continuation at this kind of run rate? Do you anticipate being a net repurchaser of shares more than offsetting dilution?

Todd Adams: I think the way we’ve approached it, Nathan, is we look at the intrinsic value of what we think the company is worth. And when we feel like it’s undervalued relative to that, we do a little bit more. When we think it’s getting closer, we do a little bit less. I think on balance, we are going to be a repurchaser of shares, I think, somewhat consistently moving forward. What that means in the third quarter and second half, we’ll have to find out. But I think that if you look at last year, we did 125, Dave? We’re sitting at 80. I think it’s entirely realistic to think that we get close to that this year. We’ll have to take a look. But that’s how we think about it, Nathan.

Nathan Jones: I guess a follow-up question I’ll ask on growth initiatives. Can you talk about the major growth initiatives that you’ve got going on out there? I know there’s some in the drinking water business, but maybe just any commentary around growth investments, growth initiatives that you’re focused on in other parts of the business?

Todd Adams: We tried to cover a few of those last quarter. So we have some substantial growth runway in our commercial brass business. So think about sensor products that would go and compete against somebody like a Sloan. We’ve got a number of growth initiatives there, a combination of new products and penetration with some critical key customers and verticals. That’s moving along quite well. We have an initiative on our flow systems side where we’ve developed a bunch of new products over the course of the last 2 or 3 years, driven the specification. And we’re now seeing those commercialized. So that’s gotten nice momentum this year and doing quite well. And then, obviously the drinking water thing. And I’ll let Dave talk a little bit about the drinking water thing.

But that is going to be, for us, the most important thing that you hear from us over the next couple of years. And obviously the amount of time and effort we’re putting into both the new product development that will occur later in this year, in the first part of next year, and the commercialization through K-12 schools and health care will be a big deal. And a lot of it is legislation driven. Dave’s been, I would say, in lockstep with that part of the business. So I’ll let him talk about it.

David Pauli: Yes. So maybe a couple of comments on drinking water, Nathan. In the quarter, we continue to see filtered units and then increasing the attachment rate of filters to those units. From a legislative perspective, we’ve talked about Michigan having passed the Filter First legislation requiring all K-12 schools and daycare facilities to have filtered water available. That was passed into law last October. Michigan is still in the process of rolling out just how schools get funding, the bills funded by the state of Michigan. And then there’s also 3 other states that currently have legislation that was proposed either late in ’23 or early in 24 that looks a lot like the Michigan Filter First legislation, and those three states being Wisconsin, Minnesota, and Pennsylvania.

Operator: A question comes from the line of Mike Halloran with Baird.

Mike Halloran: So first question, just on — you counted on the stability on the aftermarket side, the MRO side of the portfolio. Are you seeing much of a trend difference between the MRO side right now and the original equipment side on the portfolio?

Todd Adams: When you say original equipment, I’m guessing you mean new build?

Mike Halloran: Yes, new build construction.

Todd Adams: I think it depends by vertical. I think when we look through the retrofit, replace, or break, fix part of our business, that’s pretty steady all the time. I think when you go to the new build side of life, obviously institutional is stronger than commercial and residential. So, I think it’s sort of [indiscernible] change to that. I would say that in aggregate, at present, retrofit replace is growing less than new build institutional, but more than commercial. So that’s — 45% of the business is retrofit, replace, growing steadily in the low single-digit range.

Mike Halloran: Makes sense. And then, kind of you’ve more or less gotten through all the product rationalizations, you’ve had all kind of portfolio for a while now. How do you think about what your market outgrowth looks like? Is this a few points per year, given all the initiatives you have relative to what the end markets are growing? Maybe just unpack that a little bit.

Todd Adams: Well, if you look back over those 10 years and probably even a longer timeframe, the growth algorithm has been a couple points of outgrowth taken as a whole. And I think when you roll that through the various cycles between institutional, commercial — institutional be a little stronger at times, commercial be a little bit stronger at times, residential be a little bit stronger at times, and parts of the cycle, 1 will be stronger or weighing force, and there’s a massive installed base of things that need to be replaced on a somewhat regular basis or break and need to be repaired. And so, when you roll that through, that’s 2 points of market, 2 points of price, a couple points of outgrowth. I don’t think anything has changed.

If anything, longer term, the drinking water part of our portfolio should grow faster than the market. And it will grow faster, as Dave pointed out. That’s been something that’s been true for a long time. And with the amount of effort and innovation we’ve been putting into it, I think I’m confident to say that I think it changes and probably gets a little bit better. So, the current 3%, we’re undergrowing by 3%. A lot of that is, we’re not as — we haven’t been as aggressive on price in the moment. And we’re absorbing some of the commercial headwinds, but still growing at 3%. And so, I think, we see the opportunity to migrate back to that mid-single-digit growth with everything I see and the addition of drinking water.

Operator: The next question comes from the line of Jeff Hammond with KeyBanc Capital Markets.

Jeff Hammond: [Indiscernible] was down 8. I think you said resi was flat. So I just wanted to understand what the pressure was within that all other. And then just on the CAO move, congrats to Dave.

David Pauli: Yes. Maybe I’ll take the first part of your question, Jeff, just on the all others. So what you’re seeing in the 10-Q is the GAAP reported number. So you got to remember, there’s this key rationalization doesn’t have to be down.

Todd Adams: Yes. So with respect to Mark, obviously Mark and I have worked together for more than 20 years. He’s been here 18, CFO for 13. And as you reminded me yesterday, did 50 earnings calls. So, the nice thing about Mark is, he understands our business inside and out. And he is a tremendous resource to both Dave and I and the broader company as we think about growing the business going forward. So, one of his biggest focus areas is going to be on the continued org and talent development process that we have, and it’s working effectively. But I think — we think about it as how much more can we do. Because obviously, as we acquire and grow, we’re going to need more talent. And so, the ability to do that organically will be really important for us.

And particularly when you get into a situation like an Elkay, where the reality is — and when you think about an integration of a larger more significant business down the road, he’s someone who can step in day 1, be ready to communicate, how we do things, bring people along in terms of implementing the business system and things like that. So that’s where his focus is going to be. And the three of us sit approximately 8 feet apart. So it’s nice to have Mark in the fold doing some really important things for us for the future.

Jeff Hammond: I wanted to follow-up on the margin outperformance. So, above the high end of the guidance range, I was hoping you could dimension the positive variances versus the internal forecast for the second quarter. And then thinking about the forward guide, so you’re betting some continued margin expansion in Q3, looks like it flattens out in Q4. Is that simply just reflective of the tougher sales comparison? Is there conservatism? Any color would be great.

David Pauli: Well, Brett, I think we tried to communicate that, look, what’s driving the margin performance, I think are a lot of the structural — we measure the number of continuous improvement activities we’re doing, right, and we don’t measure it to measure it. We measure it to deliver better earnings, better cash flow, improved lead times, and things like that. And so, sitting here today through the first half, the number of continuous improvement activities are up 42% year-over-year. So there’s not 1 big thing, but that compounding benefit of our 2,400 people getting up every day and doing just something just a little bit better is what is driving the outperformance. I think it’s not like we got surprised and bought materials that are a whole lot cheaper than we thought going into the quarter.

You can’t turn it off. It’s just sort of that constant engine that’s creating more and more productivity and cost savings. And so that’s, to me, the biggest reconciling item that we think about because up 42% in a lot of small things adds up. And so, I don’t think it’s going to slow down in the third quarter. I don’t think it’s going to slow down in the fourth quarter. I don’t think it slows down in ’25. But I don’t think that there’s anything that we’re going to give you that’s going to answer the question other than it’s just relentless continuous improvement across the board.

Jeff Hammond: That’s great. I appreciate the color. And then just 1 follow-up on tariffs, and certainly more topical given the political landscape. Could you just level set us on your sourcing exposure to China and Mexico specifically? And is there more work to do? And how can you modulate if the tariffs do step up here post November?

Todd Adams: Yes, I think 1 of the big things to recall is, back in 2016 when the tariff situation all began, we took the position of — the long-term position of trying to find a supply chain for us that vastly deemphasized China. And we’ve been working at that continuously for, I would call it, 8 years. And so, we feel like our supply chain with the work we’ve done over that time frame, and it’s been a terrific job by our team puts us in a spot to, I don’t want to say skate around, but clearly become more advantaged than we are today with respect to tariffs, may or could happen. If it’s different than that, we’ll have to manage through it. But I think we’re in a terrific spot to begin to reap some of the benefits of the supply chains we’ve…

Operator: I will now turn the call back over to Bryan Wendlandt for closing remarks. Please go ahead.

Bryan Wendlandt: Thanks to everyone for joining us on the call today. We appreciate your interest in Zurn Elkay Water Solutions, and we look forward to providing our next update when we announce our third quarter results in late October. Have a good day.

Operator: Ladies and gentlemen, that concludes today’s call. Thank you all for joining, and you may now disconnect.